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9: Equity Financings > 9.3 PREPAID FORWARD + EQUITY SWAP + PLEDGE
9.3 PREPAID FORWARD + EQUITY SWAP + PLEDGE
9.3.1 Product Description
One way to raise cash without selling the shares is to combine several derivatives into a transaction that mirrors the flows of a loan as follows:
1. A prepaid forward transaction in which the investor is short a forward (i.e., commits to sell the shares to the lending bank at maturity at the then prevailing price) and receives the financing amount upfront in the form of a prepayment. At maturity, the forward is cash settled (i.e., no effective transfer of shares).
2. A price return equity swap transaction in which the investor receives (pays) the positive (negative) performance of the stock at maturity. This equity swap is a price return equity swap, and thus, the investor is exposed to the performance of the stock price only (i.e., dividends are excluded from the return computation).